Impact on Expected Returns and Risk Assessment:

Biased Expected Returns:

Behavioral biases can lead to inaccurate estimations of expected returns, as investors might not be using the CAPM inputs correctly.

Misallocation of Capital:

Overconfidence and loss aversion can lead to misallocation of capital, as investors might invest in stocks that are not the best fit for their portfolio, based on the CAPM.

Increased Volatility:

Herding and other biases can increase market volatility, as investors are not making rational decisions, leading to price swings.

Underlying Risk:

Behavioral biases can lead to an underestimation of underlying risk, as investors might not be fully aware of the potential losses associated with their investments.